CSSE 490:

Fundamentals of Product Management

Week 3: Business Models and Competition

Agenda

• Discuss P/M fit and MVPs
• Business models
• Evaluating the competition
• Go-to-market resources

Let’s talk MVPs

What business models exist?

A quick rundown of business models

• Selling things once
• Selling things repeatedly
• Selling leases on things
• Selling to really large companies
• Giving things away for free
• Taking a cut of what other people sell/Selling a layer above other things
• Selling a place for other people to sell things
• Selling a thing that lets other people build anything above
• Crime

X2Y: B2B, B2C, D2C, B2D, B2E, C2C, C2B...

• B = Business
• C = Consumer
• D = Developer
• E = Enterprise

D2C is weird because it’s “Direct to Consumer”

[e]Commerce (“selling things once”)

• What: Selling items to customers as needed
• Who: Walmart/Jet, TurboTax
• How it works: Customers need things, you have them!
• How it fails: Selling things for less than you paid for them, high overhead (e.g. inventory)

Subscription (“selling things repeatedly”)

• What: Selling recurring access or products that appear periodically
• Who: Birchbox/Dollar Shave Club, Adobe Creative Suite
• How it works: Novelty or boredom, lock in, zombie revenue
• How it fails: Saturation, higher initial cost, user churn, zombie revenue

Case Study: Adobe Creative Cloud

• Adobe used to bundle products into the Creative Suite, sold annually for a fixed price
• Switching to a subscription model targets two new revenue streams:
• Recurring revenue from professionals who didn’t renew every year
• New revenue from amateurs who couldn’t afford the full suite but could afford monthly
• Pitfalls:
• Sales teams worried it would cannibalize existing sales process
• Customers angered that they would be paying more

Case Study: Adobe Creative Cloud

“There's only two ways I know of to make money: bundling and unbundling.”

Jim Barksdale

Bundling

• What: Selling related items together
• Who: Microsoft (Windows, Office, IE), Cable/Internet/Phone plans, Disney/Hulu/ESPN+
• How it works: Products have different margins, so you can add high margin items to low margin ones
• How it fails: Consumers are wary of bundles and often frustrated with unused parts

Unbundling

• What: Selling individual items, broken apart from their packaging
• Who: iTunes store (individual songs), Cloud Platforms (except these are secret bundles)
• How it works: Customers pick and choose exactly what they want
• How it fails: Paradox of choice (too many options)

Music: bundling and unbundling

• Go to a concert (unbundle)
• CDs (bundle)
• Individual MP3s (unbundle)
• Streaming services (bundle)
• TikTok??? (unbundle)

Rental (“selling a lease”)

• What: Selling items for a short time period
• Who: Hertz/ReachNow, Rent the Runway, Blockbuster/Netflix
• How it works: Fractional ownership makes expensive things affordable for a wide variety of people
• How it fails: Loss of product via theft/abuse/depreciation, disruption via other channels

Enterprise (“selling to large companies”)

• What: Selling bespoke contracts for complicated services
• Who: Iron Mountain (document shredding), Corovan (office moves)
• How it works: Enterprises have lots of money, often very specific needs (including compliance, which is a moat)
• How it fails: Enterprise sales cycles take a long time, are very high touch

Free/freemium (“giving things away”)

• What: Grow a large user base by being the cheapest option
• Who: Literally every app
• How it works: Advertising, upsell to remove ads/unlock features
• How it fails: Ads don’t make that much money until you get to scale, underlying infra is fixed/growing cost to that point

Cost Per ...

• Cost Per Impression (CPI)/Cost Per Mille (CPM): ~$1/1000 impressions/views of an ad
• Cost Per Click (CPC): ~$1-5 per click, but can go up to $10’s or $100’s depending on the search (e.g. credit cards, legal services, etc.)
• Cost Per Acquisition (CPA): ~$10-100 (total cost to acquire a customer: promotions, etc.)

Click Through Rate (CTR): % of people who convert from CPI to CPC (<1%)

Referral marketing

Aka “how every lifestyle blog makes money”

• Create a niche review website (e.g. The Points Guy, Nerd Wallet, etc.)
• Create referral marketing account w/ companies (Amazon, Chase, etc.)
• Add links to the product being reviewed (book, credit card, etc.)
• ???
• Profit

Transactional (“taking a cut of other’s sales”)

• What: Fee or % based cut of some transaction
• Who: Amex/Visa/MC, Stripe, PayPal/Venmo, Robinhood
• How it works: Small % of huge processing volume
• How it fails: Requires huge volume to make significant revenue

Marketplaces (“selling a place for other products”)

• What: Connect buyers and sellers
• Who: Ebay, Craigslist, Etsy, Amazon, Google (Adwords and Admob), Uber, Airbnb
• How it works: Streamlines existing informal/inefficient marketplaces, network effects
• How it fails: Prioritizing the wrong stakeholder, regulatory hurdle

Marketplaces work due to network effects

The bigger the network, the more effective it is

Positive externality: when 3rd parties benefit from a transaction

Large networks have momentum

(high switching costs, positive reputation)

Platforms (“selling a place for other’s businesses”)

• What: Provide a service that lets others
• Who: Wordpress, Wix/Squarespace, Heroku/Zeit, AWS/GCP/Azure
• How it works: “selling pickaxes during a gold rush”, network effects
• How it fails: Not effectively monetizing

Successful platforms

“A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.”

Bill Gates

Consulting (“selling ideas”)

• What: Outsiders with specific expertise brought in to solve certain problems
• Who: Accenture/Deloitte/PWC
• How it works: Deep knowledge in certain areas (e.g. regulatory compliance) means high billing rates
• How it fails: High CAC, customer churn is inherent

Partners/Resellers (“selling other people’s stuff”)

• What: Other companies sell your product as part of their business
• Who: Consulting companies (e.g. Deloitte sells SAP), resellers
• How it works: Less need to directly support a sales team/bigger ecosystem
• How it fails: End customer frustrated with complexity of the offering, high cost

Virtuous cycles

“Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.”

The Everything Store

Regulatory arbitrage (“crime lite”)

• What: Exploit gaps in legacy legal frameworks
• Who: Uber/Lyft, Airbnb, basically the entire gig economy
• How it works:
• Identify legal grey area in a regulated industry
• Provide a below cost service that directly competes with the regulated option
• Taxi medallions, hotel taxes/fees, etc.
• Get enough consumer demand (because of the cheaper product) to change the law to allow your previously unclear business model
• How it fails: Regulation not going in your favor (see AB5), obvious race to the bottom where your product becomes the same as the thing you arbitraged

Crime (just don’t call it that)

• What: You perform criminal acts (theft, fraud, bribery, etc.) as an integral part of your business
• Who: Criminals
• How it works: Stealing things == acquire at a low cost, sell at a high cost; smuggling lowers per-unit costs, bribery or forgery results in faster approvals or papering over fraudulent results…
• How it fails: When you get caught (the critical piece here is not getting caught)

Exercise: every business model

Buying a watch

• Ecommerce: Too many to list
• Subscription: watchgang.com
• Rental: Eleven James, Borrowed Time
• Enterprise: govt contracts for police/military
• Free/freemium: “sign up for X and get a free watch” IG ads
• Referral marketing/ads: A Blog To Watch, Worn and Wound
• Transactional: … bill by the hour? Bill by # of times checked?
• Marketplace: chrono24.com, WatchUSeek
• Platform: Esslinger, Otto Frei, go to Switzerland
• Consulting: …
• Crime: steal a Rolex

​

Competitive analysis

You are competing with all the other solutions in the market

Telling the time

• Watch (mechanical, digital, smart)
• Clock in the room (including digital assistants)
• Phone (or computer, or other device based clock)
• Asking someone “what time is it”
• Looking up at the sun
• Not caring enough to do any of the above

Learning from the competition

• They often publish market sizing and revenue numbers (especially if it’s a public company in an established industry–read the 10-K) → Performs free market validation
• If a company fails but there’s obviously a market for the good/service, it’s likely the business model was wrong → Try a different business model
• Different business models appeal to different demographics (mostly differentiated by socioeconomic standing)

Dangerous places to be

• Competing with an incumbent on price alone (race to the bottom)
• Short term rentals of long term items (carrying a significant balance), especially in discretionary spend (e.g. luxury items, WeWork)
• Being replaced by a platform wide solution (e.g. getting “sherlocked”)
• High CAC, high churn businesses (e.g. Blue Apron)
• One sided marketplaces with more supply than demand

You need to understand how you’re different

You need your differences to be significant

Certain advantages

• Founders are top 1% (or 0.1%, etc.)
• Market (rising tide lifts all boats)
• Product/price (10x faster, better, cheaper)
• Acquisition cost (you can acquire customers cheaper, or free)
• Monopoly (or other moats)

Successful companies often have a monopoly

Most mature companies build moats

Moat examples

• Vendor lock in: proprietary chargers/connectors (e.g. Apple Lightning), consumables (e.g. film)
• Vertical integration: Apple builds silicon to TV content
• Horizontal integration: Google and Facebook are “ads on the internet”
• Google: browser, mobile OS, software tools for both, internet balloons, etc.
• Facebook: smart home devices, VR headsets, internet airplanes, etc.
• Regulatory barriers: Finance, healthcare, defense/aerospace, ...

🚨🚨🚨 Warning: antitrust 🚨🚨🚨

Typically, US regulators care about

consumer benefit

Regulators in other locations may care about overall fairness

Putting it all together

Micro Escrow: part 1

• Problem: people buying and selling items on online forums (car parts, watches, etc.) don’t have good solutions for ensuring product and money gets sent (lots of scams)
• Solution: provide a free escrow service linked with existing solutions (Venmo/Paypal) with a method of verifying the item promised is the item sent (item photos include a unique code the buyer can verify on receipt)
• Insight: existing solutions are too heavyweight (b/c escrow resolution requires arbitration), imply a lack of trust

Micro Escrow: Part 2

• Market size: ~100 specialty forums with ~$1000/week in transaction volume (maybe break down to 10 forums at 10k/week, 45 forums at 5k, 45 forums at 1k) = $370k/week = ~20M volume per year
• MVP: Run it on Venmo and PayPal (note, clear violation of ToS); find high volume sellers on specific forums and pay them to sell via Micro Escrow (e.g. give them 1% of the sale price)
• Risky assumptions: consumer trust, actually getting 2%, regulatory requirements (US has no federal, but there are per-state regulations)

Micro Escrow: Part 3

• Business model: transactional, assume 2% (overnight finance rate/treasury bills) → $400k in ARR (“invest the float”)
• Competition: escrow.com (C2C), Paypal/Venmo
• Related: Lots and lots of tiny firms (C2C), Iron Mountain (B2B, B2E)
• Future expansion: source code escrow for contractors (integrate w/GitHub)

For next week

• Read “Aggregation Theory” and “Defining Aggregators”
• Define the business model for each product
• Perform competitive analysis on each product: who the competition is, how they threaten your product (what advantages do they have over you)
• Find one company whose business model you don’t understand and try to understand it